Hong Kong – Has Asia’s boomtown reached a crossroads?

Interview with Andrew Work, Editor-in-chief, Harbour Times

Towering skyscrapers, glittering facades, rapid economic growth, wealth: In many a mind Hong Kong is THE Asian success story, a globalized city which has grown rich through freedom and trade. But what exactly are the foundations of Hong Kong’s prosperity? And what are the city’s future prospects?

EFN: Hong Kong arguably is one of the most open market economies in the world. Its prosperity is based on free trade in goods, services and capital. If you look at indices that measure freedom of trade, for example Fraser’s Economic Freedom of the World report, you get the impression that Hong Kong is the undisputed champion of economic freedom. But how did it all start?

AW: Well, you could make the argument that it all started with the trade in opium which was the single-most profitable good traded in Hong Kong back then. The British colonial government raised a 5%-tax on the stuff, but it is important to bear in mind that this tax was never meant to be a tool for economic development. It was literally the colonial government’s only source of income. But when London during the 1930s finally became serious about cracking down on the opium trade, Hong Kong faced a major problem. The colonial government found a creative way to deal with the quandary it found itself in. When they returned accounts one year, 95% of government revenues fell under the category “miscellaneous”. So, the government was doing quite well with their income from the opium trade, and they never really saw the need to levy general import or export taxes.

EFN: But World War II did finally put an end to the opium trade. How did that affect Hong Kong?

AW: At that point Hong Kong had already established itself as an important Asian trade center and the people of Hong Kong, their jobs, incomes and prosperity very much depended on the flow of goods through the harbour. And this meant that Hong Kong’s DNA remained free of policies that, for example, aim to protect local industries from foreign competition through taxation. Hong Kong was always wide-open for trade, only few goods were subject to import duties. And in some cases abolishing such import duties has even proved beneficial.

EFN: For example?

AW: Well, a recent example would be the de facto elimination in 2008 of the import duty on wine. The duty was actually not abolished, but reduced from 60% to 0%. This has had a tremendous effect: Within only one year the total value of wine traded in Hong Kong doubled. Practically overnight the city became Asia’s trade and auction hub for fine wine. This has turned out to be immensely profitable and has led to the creation of new infrastructure – such as special warehouses – and jobs. In effect an entirely new industry sector has emerged within the blink of an eye.

EFN: In Europe we are witnessing a rather emotional debate about the Transatlantic Trade and Investment Partnership (TTIP). Here in Asia negotiations over the Trans-Pacific Partnership (TPP) were concluded last year. In how far are free trade agreements relevant to Hong Kong?

AW: FTAs mainly deal, and I am simplifying a bit here, with the mutual dismantling of tariff and non-tariff trade barriers. There’s not much to dismantle in Hong Kong in that regard. But Hong Kong has negotiated a couple of FTAs during the past few years, for example the ones with EFTA and Chile, and the Closer Economic Partnership Agreement (CEPA) with China. While, on the face of it, signing CEPA didn’t make that much difference at first, its later iterations tackled some issues of importance to Hong Kong. One example would be the mutual recognition of academic titles and professional qualifications.

The reduction of barriers within the framework of CEPA could be beneficial – both for foreign professionals who want to settle in Hong Kong and for Hong Kongers who wish to offer services in mainland China.

Many restrictions remain on offering services in Hong Kong. The Medical Council of Hong Kong makes it very hard for foreign physicians to settle in Hong Kong and offer medical services. The same applies to foreign lawyers. In my view these are unnecessary restrictions that reduce consumer options.

As far as TPP is concerned, I am convinced that Hong Kong will profit immensely, even though it is not a part of the treaty. Hong Kong very much depends on world trade. If trade is flourishing, Hong Kong prospers.

EFN: What are the long-term prospects of Hong Kong?

AW: That very much depends on how Hong Kong will elect its Chief Executive (CE). Hong Kong’s constitution, the Basic Law, is in many regards a fantastic legal document. But unfortunately it vests the Chief Executive with a lot of power. Let me give you an example: Suppose you want to file a complaint against the police. You would then turn to the Independent Police Complaints Council. Its members are appointed by the Chief Executive. But he [the CE] also appoints the police chief and has the final say on nominations to the High Court. Furthermore, the Chief Executive appoints the head of Hong Kong’s anti-corruption commission. This goes to show that too many institutions depend on the CE, a person who in theory has two masters: The people of Hong Kong and Beijing. But ultimately all important decisions are made by Beijing.

EFN: So, in a manner of speaking, very much depends on whether China understands Hong Kong or not?

AW: Precisely; unfortunately right now it seems that the leadership in Beijing shows little understanding of Hong Kong. Beijing doesn’t appreciate that the more they meddle in Hong Kong’s affairs, the more opposition they will face. Some people might simply decide to pack their stuff and leave. And these are dire prospects. Hong Kong became rich because the city was always allowed to do what lay in its interest. Hong Kong experienced rapid economic growth and lifted millions out of poverty long before China started to catch up. But this is a view that is not shared on the mainland. In China, the perception prevails that Hong Kong owes its wealth to China alone. I have the feeling that, if in doubt, Beijing has more interest in exerting control over Hong Kong than seeing the city prosper. The thinking seems to be: If China isn’t perceived as being in full control of Hong Kong, other regions on the mainland might become restive as well.

Andrew Work is the Publisher and Editor-in-Chief of Harbour Times, the flagship of New Work Media. New Work Media is a trade media firm serving industries including Hong Kong government and politics, diplomacy and the self-storage association. The firm also works with major corporations on in-house publications. He is also a Co-Founder Founder of The Lion Rock Institute, Hong Kong’s first economic think tank. He was the Executive Director of The Canadian Chamber of Commerce in Hong Kong, instrumental in growing membership and advancing business policy objectives. He has lived in Hong Kong since 1996. He is a graduate of McGill University (B.Sc.) and the University of Victoria (MBA).